Posts Tagged ‘Iowa’

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Underlying Facts Supporting Farmland Prices

Thursday, February 2nd, 2012

I recently attended the annual Land Investment Expo in Des Moines, Iowa and listened to an interesting presentation by Jim Knuth, Senior Vice President of Farm Credit Services.   Because it has so many local lending offices, Farm Credit has the ability to collect and analyze an incredible amount of land sale data.  The discussion included some general information, e.g., land values in IA have increased 34% the past 12 months, along with some more obscure (though important) statistics, some of which may explain how we’ve arrived at these current price levels. To wit…

1. In 2006, there were 6207 real estate sales in the territory serviced by the Farm Credit Services of America district (IA, SD, WY, NE).  In 2011, the number dropped to 4434 sales, confirming that there is a lot less land available to buy.

2.  In 2009, the debt to asset ratio for district borrowers was 35%.  In 2011, the ratio actually dropped to 34% despite higher land prices.  In addition, the loan to collateral value over the same period dropped from 54% to 48%. This confirms that the balance sheets for farmers continue to improve.

3.  In 2008, farmers purchased 82% of the IA farms that closed.  This number dropped to 73% in 2011, thus indicating that investors are continuing to purchase land despite the higher prices.

4.  In 2009, 29% of the land sold at public auction while in 2011 this percentage increased to 50%.  Not coincidentally, most of the record sale prices have occurred at auction, as there are a number of aggressive buyers in the market looking to add to their land holdings.

I look at the underlying land issues listed above, and am more convinced that this rapid increase in farmland values has been driven by profits and not speculation.  At some point, prices will stabilize and there may be a period where the market experiences a short-term correction.  I just can’t buy into the “bubble is ready to burst at anytime” scenario that a few economists are still predicting.

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Keeping Record Land Prices in Perspective

Friday, November 11th, 2011

Recently, a 120 acre farm in Sioux County, Iowa auctioned for 16,750 dollars per acre.  Considered a record price for farmland in Iowa, this sale follows numerous other sales across the Midwest of over $10,000 per acre. The question to be asked is: how and why are farms trading hands at $2,000, $3,000, or even $5,000 above similar properties in different areas?

An overview of the Sioux County sale recently appeared on the dtnprogressivefarmer.com website (Crazy Sioux County Land Auction Strikes Again).  As Marcia Zarley Taylor points out, the ag economy in this part of NW Iowa is unique – grain farmers have been making money, but the livestock sector is thriving as well. Many brokers and appraisers called this sale an abnormality, yet whenever you have several financially strong buyers all looking to purchase land in a specific location, the final sale price can be significantly higher than recent sales elsewhere.

Across the Midwest, all the record high prices the past 12 months have had the same common theme – the farm is ideally situated in an area where at least 2 farmers are willing and able to pay a premium for its location.  In many cases, these potential buyers adjoin the subject parcel or have driven their equipment by it for years hoping for the chance to own it someday.  In some areas, land seldom comes for sale and buyers know that they must buy now if they hope to buy at all. And sometimes, unusual variables come into play – a farmer wants to expand his livestock operation but must have additional land to spread the waste.

In all the situations mentioned above, location is the most important variable. Move a farm 5 miles in any direction and the sale price may be 25% lower… simply because the neighbors are different.  Or stated differently, record prices can be explained by looking at who the neighbors are; and non-record prices can be explained by looking at who the neighbors aren’t.  Landowners looking to sell in the next few months should keep this in mind – not every sale will set a record so make sure to set your expectations accordingly.

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Iowa Land Value Survey Results

Friday, April 1st, 2011

Last week, we reported on recent trends in the Illinois farmland market.  This week, we want to take a look at the picture in Iowa.  As you might expect, values in the Hawkeye state have moved sharply higher the past 12 months.  A recent article by Dan Piller in the Des Moines Register (IA Farmland Values Jump 24% in Last Year) provides a good analysis of what has happened and why.

There were a few things in the article that I found interesting…

1. Though the market has risen by 24% the past 12 months, much of this increase has only taken place in the last 6 (19.7%). 

2. Despite high grain prices, the areas showing the biggest gains in IA were the livestock heavy regions.  Yes, feed costs are higher but these have been offset by higher meat prices.  Both the hog and cattle industries were profitable in 2010 - the first time in four years.

3. More that 70% of recent land sales in IA were to neighboring farmers.  This contradicts the argument that “outside money” has been a major force.

4. Perhaps the most comforting comment in the article, at least for the long-term health of the land market… Iowa banks have reported generally flat demand for agricultural loans as cash-rich farmers write checks for land and equipment rather than taking out loans. 

The debate on how long this land price surge can continue is on-going.  That said, if the March 31 USDA crop reports are any indication (corn is much higher as I type this article) then the land market should continue strong for the foreseeable future.

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A Lender’s Perspective of the Land Market

Wednesday, January 26th, 2011

I had an opportunity last Friday to attend the Iowa Land Investment Expo in Des Moines.  The event featured presentations on a variety of topics – from land investments in Africa to Iowa corporate farming laws.  There was one talk in particular that I found quite interesting (The Land Market – A Lender’s Perspective).  Jim Kluth of Farm Credit Services of America looked at the financial strength of farmers in his district, amongst other topics, and concluded what I had been thinking for quite some time – farmers today are much stronger financially than what the naysayers might lead you to believe.

As we’ve all seen and read, there are several “experts” who believe that the increase in land prices and rents the past few years will ultimately lead to a repeat of the early 1980’s when farmers overextended themselves and were forced out of business.  I’ve said for quite some time that this isn’t the case, that farmers and lenders learned their lessons so a repeat of the financial calamity of 30 years ago, though possible, was unlikely.  Unfortunately, I never had any real data to support my thoughts… until Friday.  In the region that covers Iowa, Nebraska, South Dakota, and Wyoming, Farm Credit has over $6.8 billion in real estate loans with a 97.8% credit quality and a .17% delinquency rate – numbers that home lenders can only dream about. In addition, they have kept their loan-to-value ratio at 65% – a far cry from the 95% LTV ratio of 30 years ago.  Farm Credit’s results are not unique… most other ag lenders are telling a similar story about their loan portfolios.

For clarification, I am not saying that there is a 0% chance that farmers will experience some financial setbacks in the next few years… all businesses have corrections as part of their normal business cycles.  I’m just pointing out that farmers today have a much stronger financial foundation to stand on, which should help them weather the storms in the future.

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THE INCREASING TREND OF ABSENTEE LANDLORDS

Thursday, March 11th, 2010

Of those of you out there who cash rent land, do your landlords live in the area or do they live out of the county or even the state?  A recent article in The Progress Report takes a look at studies done by Iowa State economists on cash rent payments in Iowa and where those payments are ending up.  (Read the article, The Flow of Money From Rented Land in Iowa) Are the rent payments going to the landowner who lives across from the farm or to the one who lives halfway across the country?

What they found is that nearly a quarter of Iowa landowners who are receiving cash rent live outside the state of Iowa.  In some of the more fertile counties, such as Kossuth Co., this meant that roughly $13 million dollars left the county last year in the form of cash rent payments.  Is this a bad thing?  Not necessarily.  As society has trended towards more urban living over the last 50-60 years, it only makes sense that there are going to be less and less farmland owners that live in the area as farms are handed down through the generations.

What is important is that tenants and landlords stay in communication, whether they live 2 miles from each other or 2,000 miles.  As with anything, an open channel of communication will make doing business much easier.

I will go back to the question I initially asked.  How many of you farmers have landlords that live in another state?  What is your relationship like with them?  How about landowners that are reading this.  Do you own ground in a state other than which you live in?  Are you happy with the level of communication that you have with your tenant?  Let us know at eric@loranda.com.

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